a friendly service covering audit, tax, accounts, self assessment,

VAT & payroll please contact us.

New clients - easy three step process

We  offer cloud-based accounting solutions.  Using good technology saves time.  With the power of cloud accounting in your hands, you can access accurate real-time data on the go, accept instant payments and even automate repetitive tasks like invoicing. Fast, easy, touch-of-a-button software can make a real difference to the way you run your business.

Adrian Mooy & Co - Accountants Derby

... a digital firm using the best tech to help our clients

like yours grow and be more profitable.

Welcome to Adrian Mooy & Co Ltd

We offer a personal service and welcome new clients.

We are a firm of Chartered Certified Accountants

and tax advisors in Derby helping businesses

From start-up to exit & everything in-between.

Whether you’re struggling with company formation,

KASHFLOW

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SNAP

IRIS

OPENSPACE

SAGE

MAKING

TAX

DIGITAL

XERO

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RECEIPT

BANK

CHASER

FUTRLI

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GO

CARDLESS

annual accounts and taxation, payroll or VAT you can

count on us at every step of your business’s journey.  For

QBO

If you are looking for a Derby accountant then please contact us.

○  Quality checked firm - awarded the ACCA Quality Checked mark

○  Tax solutions to help you keep your income

○  Cloud-based accounting solutions

○  Transparent affordable pricing

Accountants Derby
Accountants Derby

TAX BRIEFING

SEPT 2019

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Services

We offer a range of high quality services

Web-based accounting

Xero is a web-based accounting system designed with the needs of small business owners in mind.

 

It can automatically connect to your bank and download your bank statements. From there it’s simple to tell Xero what transactions relate to and once told it remembers and looks out for similar transactions. This saves time and makes keeping your accounts up to date easier.

 

Log in from any web browser. As your accountant we can log in and provide help.

 

Making Tax Digital - VAT

Our process for delivering tax accounting vat self assessment and payroll services

 

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Our Process

Understand your needs

Firstly we listen and gain an understanding of your business and what you are aiming to achieve.

Continuous improvement

We seek your opinions on the service we provide and respond to feedback in order to upgrade and improve what we do.

Build a relationship

Success in business is based around relationships and trust. Our objective is to develop and build strong relationships with our clients, based on two way trust and respect.

Confirm your expectations

Our aim is  to help you maximise your business potential and we tailor our service to meet your requirements and agree a timetable for delivering them.

Actively communicate

Communication is important to the success of any commercial venture. It is therefore a vital part of our work with you, sharing the knowledge and ideas that help you to realise your ambitions.

Our Process

Understand your needs

Confirm your expectations

Actively communicate

Build a relationship

Continuous improvement

Straightforward and easy to deal with Adrian Mooy & Co provide an efficient, friendly and professional service - payroll, tax returns, annual accounts and VAT returns are always done on time.    Eddie Morris

Call us on 01332 202660

Testimonials

First class! Super accountant! We have been with Adrian Mooy & Co since 1994. They provide a prompt, accurate & reliable service. There is always someone at the end of the phone to help and advise us. They have always delivered and we are more than happy to recommend them.    Ian Cannon

Helpsheets

Business expenses

Being savvy with your expenses is a large part of running a successful business, regardless of its size. Claiming expenses is a simple way to keep your business tax efficient – it reduces your profit, which in turn reduces your tax payments. By claiming every allowable expense you’re making sure you don’t pay a penny more in tax than you have to.

 

For more information about exactly what expenses you can claim, see our helpsheets.

  • Properties not let at a commercial rent

    There may be a number of reasons why a property is occupied rent-free or let out at rent that is less than the commercial rate. This may often occur where the property is occupied by a family member in order to provide that person with a cheap home. For example, a parent may purchase a house in the town where their student son attends university and let it to the student, and maybe even his housemates, at a low rent to help them out. While the parents’ motives are doubtless philanthropic, their generosity may cost them dearly when it comes to obtaining relief for the associated expenses.

    Wholly and exclusively rule

    Expenses can only be deducted in computing taxable rental profits if they are incurred wholly and exclusively for the purposes of the property rental business. Unfortunately, HMRC take the view that unless the property is let at full market rent and the lease imposes normal conditions, it is unlikely that the expenses are incurred wholly and exclusively for business purposes. So, where the property is occupied rent-free, there is no tax-relief for expenses.

    If the property is let at a rent that is below the market rent, a deduction is permitted, but this is capped at the level of the rent received from the let. This means that where a property is let at below market rent, it is not possible for a rental loss to arise, or for expenses in excess of the rent to be offset against the rent received from other properties in the same property rental business.

    Periods between lets

    Where there are brief periods where the property is occupied rent-free or let out cheaply, it may be possible to obtain full relief for expenses. For example, if the landlord is actively seeking a tenant and a relative house sits while it is empty, relief will not be restricted as long as the property remains genuinely available for letting. In their guidance HMRC state, that ‘ordinary house sitting by a relative for, say, a month in a period of three years or more will not normally lead to loss of relief’. However, if a relative takes a month’s holiday in a country cottage, relief for expenses incurred in that period will be lost.

    Commercial and uncommercial lets

    Where a property is let commercially some of the time and uncommercially at other times, expenses should be apportioned on a just and reasonable basis between the commercial and non-commercial lets. Any excess of expenses over rents in the period when commercially let can be deducted in the computing the profit for the rental business as a whole. However, an excess of expenses over rent when the property is let uncommercially are not eligible for relief.

    Timing must also be considered – expenses relating to uncommercial lets cannot be deducted simply because they are incurred when the property is let commercially.

  • Company purchase of own shares

    Some shareholders may prefer proceeds from a company purchase of their shares to be treated as income rather than capital for tax purposes.  Individual shareholders selling their shares back to the company normally prefer the proceeds from the share disposal to be treated as a capital receipt, where possible. This is because the capital gains tax (CGT) rate is 10% if entrepreneurs’ relief is available, or 20% in most other cases.

    However, CGT treatment is subject to several conditions. The default position is that the proceeds from a company purchase of own shares is an income receipt and is liable at income tax rates. If the proceeds are treated as an income distribution (i.e. like a dividend), those tax rates are typically 32.5°/o and/or 38.1%. If the taxpayer carries on a trade of dealing in shares, any profits would be liable to income tax, at possible rates of 20%, 40%, and/or 45%.  Trading treatment may be appealing if (say) the taxpayer has trading losses available to offset against a profit from the transaction. Trading receipts take precedence over income distributions for tax purposes.

    Unfortunately, there is little guidance on the meaning of ‘trade’ in the tax legislation. This lack of statutory guidance has resulted in extensive case law over the years. The ‘badges of trade’ can sometimes be helpful. These were first established by the Royal Commission for the Taxation of Profits and Income in 1955, using previous case law about what constitutes a trade. Subsequently, in Marson v Morton, nine badges were identified. HM Revenue and Customs (HMRC) guidance lists these badges as follows:

    Profit-seeking motive

    The number of transactions

    The nature of the asset

    Existence of similar trading transactions or interests

    Changes to the asset

    The way the sale was carried out

    The source of finance

    Interval of time between purchase and sale

    Method of acquisition

    Taxpayers seeking trading treatment on a company purchase of own shares run the risk that the proceeds will be taxed as a distribution if their contention is unsuccessful.

    For example, in Khan v Revenue and Customs [2019], the proceeds of a company purchase of own shares (i.e. 98 out of 99 shares) from its sole shareholder almost immediately after his acquisition of the company’s entire share capital from its previous owners was held to be a distribution for income tax purposes, not a trading transaction representing the disposal of trading stock as the taxpayer argued.

    Had the taxpayer been successful, he would have made a very small profit on proceeds of £1.95 million Unfortunately, he was instead faced with a large tax bill on a distribution based on that amount.

  • Relief for trading losses

    In the event that a loss arises in a trade or profession, consideration should be given as how best to obtain relief for that loss. As with many things, there is no ‘one size fits all’ and the best option will depend on the trader’s particular circumstances.

    Option 1 – Relief against general income

    If the trader has other income, one of the easiest (and quickest) ways to obtain relief for the loss is to set against general income. However, this option is only available where accounts are prepared using the traditional accruals basis; traders using the cash basis cannot relieve a trading loss in this way.

    A claim can be made to relieve the loss against:

    • Income of the same tax year;

    • Income of the previous tax year;

    • Income of both the current and the previous tax years.

    If the trader wishes to relieve the loss against the income of the current and the previous tax year, they must choose which year has priority. The income of the priority year must be completely extinguished before the balance of the loss can be set against the other year; it is not possible to make a partial the claim and tailor the relief, for example, to preserve personal allowances.

    If the individual does not have sufficient income in the current or previous tax year, but has a capital gain, the relief can be set extended to capital gains (net of capital losses but before the annual exempt amount).

    When choosing whether to relieve the loss in this way, consideration should be given to preserving personal allowances. If other income in the year is sheltered by personal allowances, there is little benefit in making a claim against general income.

    Option 2 – Against later profits of the same trade

    A loss arising in a trade or profession can be carried forward and set against future profits of the same trade. However, the loss must be set against the first tax year in which a profit arises – again it is not possible to tailor claims to preserve personal allowances. If the loss is not fully utilised against the first year in which a profit arises, the unused balance must be set against the next tax year in which a profit arises.

    Option 3 – Relieving an early year loss

    If the trade is relatively new, the trader may be able to benefit from a special relief that applies to losses made in the early years of the trade. Under this relief, a loss that is made in the year that the trader starts to trade or any of the three subsequent years (i.e. the first four years of the trade) can be carried back and set against total income of the three years before the tax year in which the loss was made, with earlier years taken in priority to later years.

    This option is not available where accounts are prepared using the cash basis.

    Option 4 – Terminal loss relief

    In the event that a loss is made in the final 12 months of trading, relief can be claimed under the terminal loss relief provisions against the profits from the same trade taxed in the four years to cessation.

    Which option?

    The best option will depend on the trader’s personal circumstances. Consideration should, however, be given to preserving personal allowances, obtaining relief at the highest possible rate and obtaining relief as early as possible.

  • Allowable finance costs

    Although the way in which landlords obtain relief for finance costs on residential properties is changing, there is no change to the type finance costs that are eligible for relief.

    What qualifies for relief

    The basic rule is that relief is available for expenses that are incurred wholly or exclusively for the purposes of the property rental business, and this rule applies equally to finance costs. Relief is available for eligible finance costs where they meet this test.

    The definition of finance costs includes mortgage interest and interest on loans to buy furnishing and suchlike. Relief is also available for the incidental costs of obtaining finance, as long as the interest on the loan is allowable. Incidental costs of loan finance include items such as arrangement fees, and fees incurred when taking out or repaying loans or mortgages.

    Limit on eligible borrowings

    A landlord can obtain relief for the costs of borrowings on a loan or mortgage up to the value of the property when it was first let. Buy-to-let mortgages are often more expensive than residential mortgages with interest charged at a higher rate.  The loan does not have to be secured on the let property. Where a landlord wishes to buy a rental property and has sufficient equity in their own home, it may make commercial sense to release capital from the home by borrowing against it and using the money to purchase the rental property. Interest on the loan is eligible for relief, despite the fact the loan is not secured on the rental property.

    No relief for capital repayments

    Capital repayments, such as the capital element of a repayment mortgage or loan repayments, are not eligible for relief. Where the borrowings are in the form of a repayment mortgage, it will be necessary to split the payment between the interest and capital when working out the relief. The lender should provide this information on the statement.

    Example

    Mervyn wishes to invest in a buy to let property. As he only has a small mortgage on his home, he remortgages to release £150,000 of equity.

    Following the remortgage, he has a mortgage of £200,000 on his own home. Using the released equity, he buys a property to let for £150,000. He spends some time renovating the property in his spare time before letting it out. When the property is first let, it has a value of £160,000.

    During the 2019/20 tax year, Mervyn pays mortgage interest of 10,000and makes capital repayments of £10,800. The property is let throughout.

    Mervyn can claim relief for 80% of the interest costs – this is attributable to the borrowings of £160,000 (80% of the loan of £200,000), being the value of the let property when first let. The interest eligible for relief is therefore £8,000 (80% of £10,000). For 2019/20, 25% (£2,000) is relieved by deduction with the balance giving rise to a deduction from the tax due of £1,200 (75% x £8,000 x 20%).

    No relief is available for the capital repayments.

  • Are workers employees?

    It is important to know whether a worker is employed or self-employed as there are many differences in the way in which they will be taxed. Broadly, employees are taxed under the PAYE system with income tax and Class 1 national insurance contributions (NICs) being deducted from payments made to them. Class 1 NICs are also payable by employers. In contrast, the self-employed pay income tax and Class 4 NICs direct to HMRC, and are also currently liable to Class 2 NICs.

    Some important differences are that:

    • currently, self-employed people have a lower liability to NICs than employees (especially when taking into account the employer’s liability)

    • self-employed people benefit from a cash-flow advantage in the timing of tax payments under self-assessment, compared with employees taxed under the PAYE system

    • the rules allowing tax relief for expenses are generally more relaxed for the self-employed

    • in some circumstances, an employer who incorrectly treats an employee as self-employed is liable for the income tax and NICs that they should have deducted under PAYE. HMRC may treat as a net amount the figure that was intended to be paid gross.

    Employment indicators

    The term ‘employment’ is broad in scope but is not exhaustively defined. The legislation lists three types of arrangement which indicate the central meaning of the term:

    • Any employment under a contract of service

    • Any employment under a contract of apprenticeship

    • Any employment in the service of the Crown

    For tax purposes, though, the concept of ‘employment’ is normally extended to encompass also the holding of an office. The distinction between ‘office’ and ‘employment’ is only of limited interest for tax purposes. Employees are said to operate under a ‘contract of service’.

    Firstly, the terms and conditions of the engagement need to be established – normally established from the contract between the worker and client/employer, whether written, oral or implied or a mixture of all three. Then any surrounding facts that may be relevant need to be considered – for example, whether the worker has other clients and a business organisation.

    Factors indicating employment include:

    • Substitution – does the individual have to carry out the work personally, or can they send a substitute to do the work for them?

    • Control – is the individual told what to do, when and how to do the work?

    • Pay structure – is the individual paid by the hour, week or month, and are they eligible for overtime pay?

    • Hours – is the individual required to work set hours, or a given number of hours per week or month?

    • Location – does the individual work at the other party’s premises, or at a location of the other party’s choice?

    • Integration – is the individual part and parcel of the organisation?

    • Dismissal – what provisions are there for terminating the engagement?

    • Mutuality of obligations - does the nature of the contract mean that there is an obligation for the engager to provide work on the one hand, and for the individual to carry out that work on the other?

    • Benefits – is the person in receipt of benefits eg. holiday & sick pay, medical insurance or a company car?

    • Continuous work – are there long periods where the individual works only for one party?

    Workers’ rights - If a worker is classed as an employee, there will automatically be entitled to certain employment rights, including the National Minimum Wage, statutory minimum levels of rest breaks and paid holiday, and protection against unlawful discrimination

    Employment status is not determined by any one single factor. In more complicated circumstances it will be necessary to build up a picture, taking into factors such as substitution, mutuality of obligation, control, pay structure and benefits, and the wording of any contracts in place.

  • Recording directors’ expenses correctly

    It is only permissible for a company to deduct expenditure in computing its taxable profits if incurred wholly and exclusively for the purposes of the trade. Since a company is a separate legal entity that stands apart from its directors and shareholders, it will not incur personal expenses. However, many companies, particularly 'close' companies (broadly a company under the control of 5 or fewer participants) pay for personal expenses of the directors. It is important to note that where payments, either made to or incurred on behalf of a director, do not form part of their remuneration package, these amounts may not be an allowable company expense. In such circumstances it may be appropriate for these items to be set against the director's loan account. Establishing whether a payment forms part of a director's remuneration package can be complex and good record keeping is essential to back up such claims.

    Accounting disclosure requirements for directors’ remuneration include sums paid by way of expense allowance and estimated money value of other benefits received other than in cash. The money value is not the same as the taxable amount, although this is often used in practice. This means the onus is on the director to justify why amounts not disclosed in accounts should be accepted as part of the remuneration package rather than debited to his or her loan account.

    Where the expenditure forms part of the remuneration package it will be an allowable expense of the company and the appropriate employment taxes (PAYE income tax and NICs) should be paid, where relevant. Where the expenditure does not form part of the remuneration package the relevant amount should normally be debited to the director's loan account.

    Cash transactions between the company and a director may have tax consequences. Broadly, at the end of an accounting period, if the director owes the company money, a tax charge may arise. Subject to certain conditions, a charge may arise where a director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. The tax charge (known as the ‘s 455 charge’) is the liability of the company and is calculated as 32.5% of the amount of the loan. The tax charge can potentially be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the accounting period.

    Good record keeping of all cash and non-cash transactions between a company and its directors is essential. Poorly kept records can mean that information provided is not accurate, which in turn may result in non-business expenditure incurred by the directors being incorrectly recorded or misposted in the business records and claimed in error as an allowable expense. Conversely, justifiable business expenditure incurred by the directors may not be claimed or claimed inaccurately. Consequently, directors' loan account balances may be incorrect resulting in the company being liable for a s 455 charge if the loan account is overdrawn, or corporation tax relief not being claimed on allowable expenses by the company at the appropriate time.

    A review of particular accounts headings may identify directors' personal expenditure that has not yet been allocated appropriately. Transactions should normally be recorded as they occur and a detailed transaction history maintained, so that it is possible to identify the director's loan account balance on any given date.

  • Using company vans for tax-free home to work travel

    As a general rule, travel between home and work is regarded as private travel and if the employer meets the cost of that travel, a benefit-in-kind tax charge will be triggered. However, it is possible for employees with a company van to use that van to travel between home and work, and for the employer to meet the cost of fuel for such journeys, without a tax charge arising. However, as with most tax exemptions, there are stringent conditions to be met.

    Tax charge on company vans

    Where an employee has the use of a company van and private use of that van is unrestricted, a tax charge arises. The amount charged to tax is £3,420 for 2019/20. This gives rise to a tax bill of £684 for a basic rate taxpayer, £1,368 for a higher rate taxpayer and £1,539 for an additional rate taxpayer. Where fuel is also provided, a separate fuel charge applies; the taxable amount is set at £655 for 2019/20.

    No charge arises if the van is used only for business journeys or in respect of vans that meet the conditions to be regarded as a pool van.

    Restricted private use

    It is also possible to escape a tax charge but to be able to use the van for home to work travel if a condition – known as the ‘restricted private use condition’ – is met. This comprises two parts:

    • the commuter use requirement

    • the business travel requirement

    The commuter use requirement is met if:

    • the terms on which the van is made available to the employee prohibit private use other than for the purposes of travel between home and work (‘ordinary commuting’) or travel between two places where the journey is essentially the same as the home to work journey

    • neither the employee or the members of the employee’s family or household make private use of the van other than those purposes

    It should be noted that insignificant private use, such as occasionally using the van to take something to the tip, is disregarded.

    The second requirement is the business travel requirement. This is met if the van is available to the employee mainly for use for the purposes of the employee’s business travel. That is to say, the main reason that the employee has the van is because they need it for their job. The business travel requirement must be met at all times when the van is available to the employee.

    If the provision of the van is exempt, no fuel benefit arises, even if the employer meets the cost of home to work travel.

    Example

    Tony is a delivery driver. He is provided with a van by his employer for use in his work. He is allowed to take the van home at night and use it to drive to and from work. However, all other private use is prohibited. His employer pays for all fuel, including that for his journey between home and work.

    As the restricted private use condition is met, there is no tax to pay on either the provision of the van or the fuel.

  • Does the high-income child benefit charge apply?

    The high-income child benefit charge (HICBC) applies to claw back child benefit from either the claimant or his or her partner where at least one of them has income of £50,000 or more. The charge is perhaps one of the more unfair tax charges in that the person who suffers the liability may not be – and often isn’t – the person who received the child benefit.

    Nature of the charge - The charge may apply to an individual with income over £50,000 where either they or their partner has received child benefit in the tax year. It may also bite where someone else gets child benefit for a child who lives with you and they contributed an equal amount to the child’s upkeep. It does not matter whether the child living with the individual is theirs or not.

    It is important to note here that ‘partner’ does not have to be a spouse or civil partner – the charge also applies to unmarried couples living together as spouses or civil partners.

    The measure of income for the purposes of the charge is ‘adjusted net income’. Broadly, this is income after taking account of Gift Aid donations and pension contributions and, for the self-employed, trading losses.

    Where both partners each have income in excess of £50,000, the charge is levied on the higher earner; if their income is the same, it is the person who receives the child benefit who pays the charge.

    How the charge is calculated - The charge claws back 1% of child benefit for every £100 by which adjusted net income exceeds £50,000. Where adjusted net income is £60,000 or more, the charge is 100% of the child benefit received in the tax year.

    Example 1 - Suki claims child benefit for her two children. This is set at £20.70 per week for the eldest child and at £13.70 for her youngest child – equal to £1,788.80 for 2019/20.

    Suki earns £30,000 from her job as a teacher and her husband Yuto earns £55,000 (after pension contributions) from his job in IT.

    As Yuto’s adjusted net income is more than £50,000, the HICBC bites. It is equal to 50% ((£55,000 - £50,000)/100 x 1%) of the child benefit received by Suki in the year, i.e. £894.40.

    Example 2 - Matthew and Maria have two children in respect of which Maria claims child benefit, equal to £1,788.80 for 2019/20. Matthew has adjusted net income of £58,000 and Maria has adjusted net income of £72,000.

    As the higher earner, Maria is liable for the HICBC. As her adjusted net income is more than £60,000, the charge is equal to the child benefit paid in the year, i.e. £1,788.80

    Paying the charge - Where a person is liable for the HICBC, they must declare it on their self-assessment tax return. The tax can be paid via self-assessment. Alternatively, if the tax return was filed by 30 December 2019 and the underpayment for the year in total is less than £3,000 it can be collected through PAYE via an adjustment to the tax code.

    Worth stopping the claim? - Where the charge is equal to the full amount of the child benefit, it may seem easier not to claim it, rather than claiming it only to have to pay it back. However, child benefit paid for a child under 12 comes with National Insurance credits, helping to build up entitlement to the state pension. If the claimant does not otherwise pay sufficient National Insurance for the year to be a qualifying year, failing to claim may adversely affect their state pension. The solution is to claim but elect not to receive the benefit.

  • Gains from off-plan homes

    If you bought your home brand new and 'off-plan' you may realise a significant capital gain when you sell that property.

    This is not a problem if you occupied the property as your main home for your entire period of ownership. In that case principal private residence relief should cover the whole of the capital gain and there will be no tax to pay on the disposal. However, an issue arises if there was a delay between the date you acquired the property and the date you moved in.

    For newly built properties there can be a considerable delay between exchanging contracts to purchase (generally regarded as the acquisition date for any property) and the completion date when you move in. As HMRC have insisted that any gain is apportioned equally to every day of ownership, even when the property is not finished, the taxable gain attributed to the period when the building was incomplete can be considerable.

    Fortunately, this problem has been resolved by the Court of Appeal which has ruled that the ownership period starts when the purchaser acquires full legal rights to occupy the property. This means the period from signing a contract to buy (the contract exchange date) to the date the owner is given the keys is not subject to tax.

    If you have already paid capital gains tax as HMRC argued the gain on your half-built new home was taxable, you may be able to claim a refund of that tax.

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  • Getting ready for off-payroll working changes

    From 6 April 2020 the off-payroll working rules that have applied since 6 April 2017 where the end client is a public sector body are to be extended to large and medium private sector organisations who engage workers providing their services through an intermediary, such as a personal service company.

    There are tax and National Insurance advantages to working ‘off-payroll’ for both the engager and the worker. The typical off-payroll scenario is the worker providing his or her services through an intermediary, such as a personal service company. Providing services via an intermediary is only a problem where the worker would be an employee of the end client if the services were provided directly to that end client. In this situation, the IR35 off-payroll anti-avoidance rules apply and the intermediary (typically a personal service company) should work out the deemed payment arising under the IR35 rules and pay the associated tax and National Insurance over to HMRC.

    New rules

    Compliance with IR35 has always been a problem and it is difficult for HMRC to police. In an attempt to address this, responsibility for deciding whether the rules apply was moved up to the end client where this is a public sector body with effect from 6 April 2017. Where the relationship is such that the worker would be an employee if the services were supplied direct to the public sector body, the fee payer (either the public sector end client or a third party, such as an agency) must deduct tax and National Insurance from payments made to the intermediary.

    These rules are to be extended from 6 April 2020 to apply where the end client is a large or medium-sized private sector organisation. This will apply if at least two of the following apply:

    • turnover of more than 10.2 million;
    • balance sheet total of more than £5.1 million;
    • more than 50 employees.

    Where the end client is ‘small’, the IR35 rules apply as now, with the intermediary remaining responsible for determining whether they apply and working out the deemed payment if they do.

    Getting ready for the changes

    To prepare for the changes, HMRC recommend that medium and large private sector companies should:

    • look at their current workforce to identify those individuals who are supplying their services through personal service companies;
    • determine whether the off-payroll rules will apply for any contracts that extend beyond 6 April 2020;
    • start talking to contractors about whether the off-payroll rules apply to their role; and
    • put processes in place to determine if the off-payroll working rules will apply to future engagements.

    Workers affected by the changes should also consider whether it is worth remaining ‘off-payroll’; providing their services as an employee may be less hassle all round.

  • Working off-payroll

    From 6 April 2020, there is a change to the off-payroll (IR35) rules.

    The new rules will affect you if you work via your own personal service company.  Clients are likely to investigate the profile of the contractor workforce more closely than before.

    Contracts caught by the rules - The change could impact you if you supply personal services to large and medium organisations in the private and voluntary sector. If the client is a ‘small’ business, the rules are unchanged. A ‘small’ company meets two of these criteria: its annual turnover is not more than £10.2 million: it has not more than £5.1 million on its balance sheet: it has 50 or fewer employees.

    Who decides? - Under the new rules, responsibility for making the decision as to whether IR35 rules apply passes to the business you contract for. The key question is whether, if your services were provided directly to that business, you would then be regarded as an employee. If you or your client use CEST, HMRC’s online check employment status for tax tool, HMRC undertakes to stand by the results if information provided is accurate, and given in good faith.  In future, your client will have to provide you with the reasons for its status decision in a ‘Status Determination Statement’.

    Implications - Significant tax implications arise. If IR35 applies, the business or agency paying you will calculate a ‘deemed payment’ based on the fees charged by your PSC. Broadly, this means you are taxed like an employee, receiving payment after deduction of PAYE and employee National Insurance Contributions. If you operate via a PSC, the PSC will receive the net amount, which you can then receive without further payment of PAYE or NICs.

    Review your position -  are clients likely to query your employment status? Should you consider restructured work arrangements, or renegotiating fees? If working via a PSC, is it still the best business model?

  • Make use of the CGT inter-spouse exemption

    There are a number of tax concessions available to married couples and civil partners which recognise that their financial affairs may be interlinked. One of these concessions relates the transfer of assets between spouse and civil partner for capital gains tax purposes. The disposal is deemed to take place at a value which gives rise to neither a gain nor a loss. This means that the spouse or civil partner making the disposal does not end up with a capital gains tax bill; the spouse or civil partner acquiring the asset simply takes over his or her partner’s base cost. This rule can be very useful from a tax planning perspective as the following case studies show.

    Case study 1

    Jane and John have been married for a number of years. Jane has built up a portfolio of shares, which she wishes to now sell so that the couple can take a mid-life gap year. The sale of the shares will realise a gain of £30,000. Jane is a higher rate taxpayer and John is a basic rate taxpayer. Neither has used their 2019/20 annual exemption and the intention is to sell the shares before the end of the 2019/20 tax year.

    The annual exemption for 2019/20 is set at £12,000.

    If Jane simply goes ahead and sells the shares, she will realise a chargeable gain of £18,000 after deducting the annual exempt amount. As a higher rate taxpayer, the gain will be taxed at 20%, giving rise to a capital gains tax bill of £3,600.

    However, if Jane and John make use of the inter-spouse exemption to transfer shares which would otherwise give rise of a gain of £18,000 to John, the position is very different. Jane is left with a gain of £12,000 which is covered by her annual exempt amount, leaving nothing in charge. John, however, is left with a chargeable gain of £6,000 (£18,000 - £6,000) after deducting his annual exempt amount. As the gain falls within his basic rate band, it is taxed at 10%, resulting is a capital gains tax liability of £600.

    By making use of the inter-spouse exemption, the couple’s combined capital gains tax bill is reduced by £3,000.

    Case study 2

    Karamo owns an investment property jointly with his civil partner Robert. The property is let and the couple receive rental income of £20,000 a year. Karamo is a higher rate taxpayer, whereas Robert is in the process of setting up a photography business and earning around £14,000 a year.

    Each civil partner is deemed to have received rental income of £10,000 a year. Karamo pays tax of £4,000 (£10,000 @ 40%) on his share, while Robert pays tax of £2,000 (£10,000 @ 20%) on his share. The total tax paid on the rental income is therefore £6,000.

    By making use of the inter-spouse exemption, Karamo transfers his share of the property to Robert. As a result, Robert receives all the rental income, which is now all taxed at 20%, reducing the tax bill to £4,000, saving the couple £2,000 a year.

  • Using your car in your property rental business

    Landlords will often use their car for the purposes of their property rental business. Where they do so, they are able to claim a deduction for the costs that they incur.

    Using mileage rates

    Where a landlord uses their car for business purposes, the easiest way to work out the amount that can be deducted is to make use of the simplified expenses system and use the relevant mileage rates to claim a deduction based on the business mileage undertaken.

    For cars (and also vans) the rate is set at 45p per mile for the first 10,000 business miles in the tax year and at 25p per mile for any subsequent business mileage.

    Example

    Karen is an unincorporated landlord and has three properties that she lets out. During the tax year, she undertakes 712 business miles in her own car in respect of her property business.

    She claims a deduction of 45p per mile, a total deduction for the year of £320.40.

    Deduction based on actual costs

    The use of simplified expenses, while generally easier from an administration perspective, is not compulsory. The landlord can instead claim a deduction based on the actual costs. However, in practice this will be time consuming. Further, where the car is used for both business and private travel, a deduction is only permitted for the business element. Separating actual costs between business and private travel can be very time consuming and will only be worthwhile where it gives rise to a significantly higher deduction than that obtained by using the mileage rates.

    Capital allowances

    Capital allowances cannot be claimed where mileage allowances are claimed. Where a deduction is based on actual costs, capital allowances can be claimed in respect of the car. However, the claim must be adjusted to reflect any private use. So, for example, if a car is used for the purposes of the property business 20% of the time and for private use 80% of the claim, any capital allowance claim must be restricted to 20%.

    Other travel

    The costs of travel on public transport or by taxi can be deducted in computing the profits of the property rental business to the extent that it constitutes business travel for the purposes of that business.

  • Making Tax Digital for VAT – what records must be kept digitally

    Making Tax Digital (MTD) for VAT starts from 1 April 2019. VAT-registered businesses whose turnover is above the VAT registration threshold of £85,000 will be required to comply with MTD for VAT from the start of their first VAT accounting period to begin on or after 1 April 2019.

    Digital record-keeping obligations

    Under MTD for VAT, businesses will be required to keep digital records and to file their VAT returns using functional compatible software. The following records must be kept digitally.

    Designatory data - Business name - Address of the principal place of business - VAT registration number - A record of any VAT schemes used (such as the flat rate scheme)

    Supplies made - for each supply made: - Date of supply - Value of the supply - Rate of VAT charged

    Outputs value for the VAT period split between standard rate, reduced rate, zero rate and outside the scope supplies must also be recorded.

    Multiple supplies made at the same time do not need to be recorded separately – record the total value of supplies on each invoice that has the same time of supply and rate of VAT charged.

    Supplies received - for each supply received: - The date of supply - The value of the supply, including any VAT that cannot be reclaimed - The amount of input VAT to be reclaimed.

    If there is more than one supply on the invoice, it is sufficient just to record the invoice totals.

    Digital VAT account

    The VAT account links the business records and the VAT return. The VAT account must be maintained digitally, and the following information should be recorded digitally:

    1. The output tax owed on sales.
    2. The output tax owed on acquisitions from other EU member states.
    3. The tax that must be paid on behalf of suppliers under the reverse charge procedures.
    4. Any VAT that must be paid following a correction or an adjustment for an error.
    5. Any other adjustments required under the VAT rules.

    In addition, to show the link between the input tax recorded in the business' records and that reclaimed on the VAT return, the following must be recorded digitally:

    1. The input tax which can be reclaimed from business purchases.
    2. The input tax allowable on acquisitions from other EU member states.
    3. Any VAT that can be reclaimed following a correction or an adjustment for an error.
    4. Any other necessary adjustments.

    The information held in the Digital VAT account is used to complete the VAT return using `functional compatible software’.  This is software, or a set of compatible software programmes, capable of:

    • Recording electronically the data required to be kept digitally under MTD for VAT.
    • Preserving those records electronically.
    • Providing HMRC with the required information and VAT return electronically from the data in the electronic records using an API platform.
    • Receiving information from HMRC.

    Functional compatible software is used to maintain the mandatory digital records, calculate the return and submit it to HMRC via an API.

    Getting ready - The clock is ticking and MTD for VAT is now less than a year away.

  • Joint tenants v tenants in common – Does it matter?

    There are two different ways of owning property jointly – as joint tenants or as tenants in common. The way in which the property is owned determines exactly who owns what and also what happens when one of the joint owners dies and how any income is taxed.

    Joint tenants

    Where two or more owners own a property as joint tenants, they jointly own the whole property rather than owning individual shares. Each owner has equal rights to the whole property. When one of the joint owners dies, the remaining joint owners own the whole property. The deceased is not able to pass his or her share on to someone else.

    Example

    Helen and Harry are married and own their family home as joint tenants. The couple have three children. If, for example, Harry dies first, his share of the property automatically passes to Helen. Harry cannot leave his share of the property to his children.

    Where a property that is owned as joint tenants is rented out, the income is treated as arising in equal shares as all owners have an equal stake in the property. For spouses and civil partners this is the default position; however, there is no possibility of making a Form 17 election (see below) as the property owned as joint tenants can only be owned equally.

    Tenants in common

    Tenants in common own individual shares in the property and have more flexibility than joint tenants as to what they do with their stake in the property. On death, their stake does not automatically go to the other joint owners; rather it will follow the provisions of the will (or, if there is no will, the intestacy provisions).

    It will be beneficial to own property as tenants in common if you want to leave your share of the property to someone other than the other joint owner.

    Example

    Jack and Jane are married. Each have children from previous relationships. They own a holiday cottage as tenants in common. In their wills, they have each made provision for their share to pass to their own children.

    Where the property is let out, owing the property as tenants in common provides more flexibility as to how the income is allocated for tax purposes. Where the joint owners are spouses or civil partners, the income is treated as arising equally. However, where the actual beneficial ownership is unequal, they can elect (on Form 17) for the income to be taxed in accordance to their ownership shares where this is beneficial. If the tenants in common are not married or in a civil partnership, the income is taxed by reference to their actual stake in the property.

    Changing ownership status

    It is relatively easy to change the type of ownership, for example, if the property is owned as joint tenants it may be desirable to own it as tenants in common to enable each owner to leave their share to someone else. A property can also be changed from sole ownership to joint ownership – ether as tenants in common or joint tenants.

  • Utilising the 2019/20 dividend allowance

    The dividend allowance is quite unusual in that it is available to everyone and everyone has the same allowance. For 2019/20 the allowance is set at £2,000. In common with many allowances, it is a case of use it or lose it.

    Nature of the allowance - Although termed the ‘dividend allowance’ its nature is really that of a nil rate band. Dividends which are sheltered by the allowance form part of band earnings, but the dividends that fall within that band are taxed at a zero rate.

    Example - Harriet is a basic rate taxpayer. After taking account of her salary, she has £10,000 of her basic rate band remaining. She receives dividend income of £3,000.

    The first £2,000 of her dividend income is covered by her dividend allowance and is tax-free. The remaining £1,000 is taxed at the dividend ordinary rate of 7.5%.

    Harriet must therefore pay tax of £75 on her dividends.

    The dividend income uses up £3,000 of her remaining basic rate band.

    Family companies - In a family company scenario, it is possible to organise the shareholdings so as to spread the dividend income around the family to reduce the combined tax bill and to take advantage of each member’s dividend allowance. This is particularly useful where the family member has no other shares and the allowance would otherwise be lost.

    As dividends must be declared in proportion to share holdings, the use of an alphabet share structure, whereby each person has their own class of share (e.g. A ordinary shares, B ordinary shares, etc.) preserves the flexibility to tailor dividend payments to shareholder’s circumstances.

    Example - Andrew is the sole director of A Ltd. In 2019/20 the company has profits of £70,000 which Andrew wishes to withdraw as dividends. His wife Anne and his children Beth, Chris, Dawn and Emma all work outside the business. None has any other income from shares.

    Andrew also pays himself a salary of £8,628.

    To make use of each family member’s dividend allowance, an alphabet share structure is used, under which A ordinary shares are allocated to Anne, B ordinary shares are allocated to Beth, C ordinary shares are allocated to Chris, and so on.

    Each family member receives a dividend of £2,000. As this is sheltered by their dividend allowances, this enables £10,000 of dividends to be paid tax-free. Had Andrew received the dividends paid to family members, they would have been taxed at the dividend higher rate of 32.5%.

    Making use of the family’s dividend allowances reduces the overall tax bill by £3,250.

    Other opportunities - Where one spouse or civil partner has substantial shareholdings and their partner does not hold any shares (with the result that their dividend allowance is unused) the shareholding partner could consider transferring shares to their spouse/civil partner (taking advantage of the ability to transfer the shares for capital gains tax purposes on a no gain/no loss basis). This will shift dividend income from one spouse/civil partner to the other and enable dividends that would otherwise be taxed to be received tax-free.

    Taxpayers with unused dividend allowances could also discuss their investment strategy with their financial adviser with a view to exploring whether it would be beneficial to hold shares – but remember not to let the tax tail wag the dog.

  • Dealing with finance costs correctly

    The self-assessment deadline is looming. Self-assessment tax returns for the year to 5 April 2019 must be filed online by 31 January 2020 if a late filing penalty is to be avoided.

    Landlords will need to complete the property income pages. Particular care should be taken where the landlord has a loan or a mortgage as the way in which relief is given for financing costs is changing and the position for 2018/19 is different to that for 2017/18.

    The way in which relief for finance costs is given is moving from relief by deducting the finance costs when computing profits to giving relief in the form of a basic rate tax reduction. The 2018/19 tax year is a transitional year.

    What costs are eligible for relief?

    Interest payable on loans to buy land or property which is used in the rental business is eligible for relief, as is interest on loans to fund improvements or repairs. It should be noted that it is not necessary for the loan to be secured on the let property – the rule is that interest is allowable on borrowings up to the value of the property when first let. Thus, if a landlord borrowed against their main home to fund a buy-to-let investment property, the interest on that loan would be allowable on the loan up to the value when the property was first let. If the mortgage on the residential property is more, the allowable interest is proportionately reduced.

    Relief is also available for the costs of getting a loan.

    It should be noted that it is only the interest and other finance costs which qualifies for relief – no relief is available for any capital repayments which may be made.

    The position for 2018/19

    For 2018/19, relief for 50% of eligible finance costs is given as a deduction in computing the profits of the property rental business and relief for the remaining 50% is given as a basic rate tax reduction. This makes completing the property pages of the tax return slightly tricky as the information must go in two places.

    The first box which needs to be completed is Box 26. This is where allowable loan interest and other financial costs need to be entered. Amounts entered in this box are deducted in computing rental profits. Therefore, as only 50% of the allowable finance costs for 2018/19 are relieved in this way, only 50% of the costs for that year should be entered in this box.

    The remaining 50% is entered in Box 44, helpfully titled ‘Residential finance costs not included in box 26’. The amount entered in this box is used to calculate a reduction in the landlord’s tax bill. The reduction is equal to 20% (the basic rate of income tax) of the amount entered in Box 44.

    If you have any unrelieved finance costs from earlier years, these should be entered in Box 45. Any balance of residential finance costs which is unrelieved may be carried forward to future years for relief by the same property business.

  • Legal and professional fees – Capital or revenue?

    At some point, a landlord is likely to incur legal and professional fees in connection with the running of their property rental business. It is easy to fall into the trap of assuming that these costs can be computed in calculating taxable profits if they are incurred wholly and exclusively for the purposes of the business; however this is only part of the story. The landlord must also determine whether the costs are revenue or capital in nature. The rules also differ depending upon whether the accounts are prepared on the cash basis or using traditional accounting under the accruals basis.

    The rule - The nature of the legal fees follow that of the matter to which they relate – so if the fees are incurred in relation to an item which is itself revenue in nature, the legal and professional fees are also revenue in nature. Likewise, legal fees that are incurred in connection with a matter that is capital in nature are also capital in nature.

    Legal fees that are revenue in nature would include, for example, fees incurred to recover unpaid rent, while legal fees that are capital in nature would include fees incurred in connection with the purchase of a property.

    Cash or accruals basis - Revenue items are deductible in computing profits regardless of whether they are prepared under the cash or accruals basis, although the time at which the relief is given will differ. Under the cash basis, the deduction is given for the period to which the expenditure relates, for the cash basis the deduction is given for the period for which the expenditure is incurred.

    For capital expenditure different rules apply. No deduction is allowed for capital expenditure under the accrual basis, whereas under the cash basis, the treatment depends on the nature of the item – capital expenditure is deductible under the cash basis unless the expenditure is of a type for which a deduction is expressly forbidden. Items of the forbidden list include expenditure in or in connection with lease premiums and the provision, alteration or disposal of land (which includes property).

    Example of allowable revenue items

    A deduction for legal and professional fees will normally be allowed where they relate to:

    • costs of obtaining a valuation

    • normal accountancy costs incurred in preparing accounts of the rental business and agreeing the tax liabilities

    • costs of arbitration to determine the rent

    • the costs of evicting an unsatisfactory tenant to re-let the property

    Example of capital expenses

    The following are examples of legal and professional fees which are capital in nature:

    • legal costs incurred in acquiring or adding to a property

    • costs in connection with negotiations under the Town and Country Planning Act

    • fees incurred in pursuing debts of a capital nature, such as the proceeds due on sale

    Leases - Leases can be tricky. The expenses incurred in connection with the first letting or subletting for more than one year are deemed to be capital and therefore not deductible – this would include the legal fees incurred in drawing up the lease, surveyors’ fees and commission. However, if the lease is for less than one year, the associated expenses can be deducted. Normal legal and professional fees on the renewal of a lease are also deductible if the lease is for less than 50 years; although any proportion of the fees that relate to the payment of a premium are not deductible.

    If a new lease closely follows the previous lease, a change of tenant will not render the associated fees non-deductible. However, if the property is put to other use between lets, or a long lease, say, replaces a short lease, the associated costs will be capital and non-deductible.

  • Where entrepreneurs' relief falls short

    When you sell your business you can expect to pay capital gains tax on any gains you make.

     

    Currently CGT is payable at 10% (if within your basic rate band for income tax) or 20% on such gains. But the 10% rate can also apply to gains of up to £10m if entrepreneurs' relief (ER) applies.

     

    To qualify for ER the business must have been trading for at least two years before the sale date. A business is trading when most or all of its activities relate to a trade rather than to investments.

     

    The focus for ER is on the effort put in to produce the trading or investment income, rather than the proportion of turnover which is generated by the investments compared to the trade.

     

    For example, a cash-rich company may receive much of its income from passive investments but the directors spend all of their time try-ing to drum up new sales leads. As long as the majority of the activities of the company (expenses and time spent) relate to the trade, the company will be considered to be trading even if most of the income arises from the passive investments.

     

    By contrast, a company which owns a let property that the directors spend some time managing will not be considered to be a trading company unless there is some other activity within the company which can be classified as a trade. Letting a property is only regarded as a trade if there are considerable activities around receiving and catering for those who pay the rent.

     

    Furnished holiday accommodation let on a commercial basis is regarded as a trade, as is a bed and breakfast business or a hotel. However letting an industrial unit is not generally treated as a trading activity.

     

    If you are thinking of selling your business, ask us to check whether ER will apply before you agree the terms of the sale.

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   Adrian Mooy & Co Ltd  -  61 Friar Gate   Derby   DE1 1DJ  -

adrian@adrianmooy.com

Adrian Mooy & Co - Accountants in Derby
61 Friar Gate Derby, Derbyshire DE1 1DJ
Phone: 01332 202660 Hours: Mon-Fri 9.00am - 5:00pm

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Adrian Mooy & Co is the trading name of Adrian Mooy & Co Ltd.  Registered in England No. 05770414.

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